In our previous posts we looked at some technical and internal business considerations when moving to the cloud. This time we’re going to look into some of the external business considerations that organizations need to think about.

What To Do About Sunk Costs?

Sunk costs are the blocker of a plethora of projects within an organization. While I understand that people need to think about capital investments that have already been made in technology, it seems counter intuitive to me to be so concerned about wasting the investment in an old clunky piece of hardware that the organization would risk future agility simply to eek out a few more cycles of depreciation on the kit. It’s well understood that people don’t like to “throw good money away” but if that good money went into buying sub-optimal solutions, the money is already lost.

Economic theory says that sunk costs should not impact decision making – human beings however are far from rational and it will often be a topic for conversation. While we don’t suggest staying on poor performing technology simply to maximize the ROI from that gear, in some cases sunk costs will need to think about a gradual move to the cloud – perhaps moving greenfield operations first, in order to lessen the impact of moving away from previously incurred capital expenditure.

Costs And Planning For Variability

If there’s one thing I find myself saying more often than anything else it’s that cloud computing isn’t about cost savings. I realize that organizations need to show a bottom line, to minimize TCO and increase ROI – but cloud is a value generator for organizations, not a cost saver. It generates value by unlocking agility, allowing focus, smoothing the erratic nature of demand and letting IT actually focus on the business rather than the technology. I really can’t emphasize this point enough.

With that said however we appreciate that organizations need to think about economic impacts of a move to the cloud, and it is important to realize that cloud computing can in fact increase the total IT spend within an organization. This increase in spending however is, counter-intuitive as it sounds, beneficial. Since cloud expenditure is directly related to demand for service (since scaling is instant and incremental, capacity is tightly linked to demand) this increase in IT spend should logically occur alongside a commensurate increase in revenue. It is true that for this to occur, good controls and systems are in place – with managers needing to have good visibility across their cloud spend. But good control is a requirement for all parts of the business.

Vendor Lock-In

In the traditional on-premise technology world the main reason that organizations could feel tied to a particular technology provider was due to existing investments in capital equipment. While there was a degree of lock-in caused by proprietary file formats, customers could still “see” their data and hence there was a perception that they had the ability to move.

Cloud changes all that for the very fact that a customer’s data isn’t sitting on a computer in their organization somewhere – rather it sits in the cloud, in some nebulous location that a customer can’t actually see. For this reason lock-in is a valid issue when it comes to cloud computing – both for software and infrastructure cloud customers.

Undoubtedly there are times that the benefits an organization will get from highly proprietary and locked-in technology will far outweigh the risks of that lock-in. Proprietary software isn’t bad per se, it just introduces an element of risk that organizations need to be aware of. Various initiatives have arisen over the past few years however that give users some options around lock-in. There are a number of open source initiatives at both an infrastructure and a platform level which help mitigate the risk of lock-in. Furthermore there are a number of industry groups that have been set up to advocate for open standards in the cloud.

Generally speaking, the sort of questions customers should ask about vendor lock-in include:

Does the vendor use industry standard APIs or proprietary ones?

Does the vendor provide quick and easy data extraction in the event that the customer wishes to shift?

Does the vendor use open standards or has it created its own ways of doing things?

Can the cloud computing service be controlled by third party control panels?

Choosing A Vendor

Like any outsourcing relationship, choosing a cloud vendor is all about building an open relationship with a vendor. It’s imperative that customers should spend time getting to know how the perspective vendor works – both from a technical perspective, but also when it comes to support, billing flexibility, service level agreements (SLAs) and long term business viability. Choosing a cloud provider is no different from choosing other utility suppliers – it’s about ensuring the right product at the right price, backed by the right level of service all with some certainty that the vendor will continue to be around for the foreseeable future. The key here is due diligence. A move to the cloud in no way reduces the requirement for this!

Articles in this series

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. His business interests include a diverse range of industries from manufacturing to property to technology. As a technology commentator he has a broad presence both in the traditional media and extensively online. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

Great post Ben. Although many people focus on cost, cloud has so many potential benefits — scalability, flexibility, etc. However, moving to the cloud is something that necessitates developing a solid strategy in advance. Also, being able to truly leverage what the cloud provides should start with a tune up of existing infrastructure including virtualization of inhouse servers. Whether you are at an SMB or enterprise, you need to map out what you are looking for/true needs in advance so that you can take the route that makes the most sense. HP and VMWare have a great self assessment (j.mp/vmvirt) designed to help get the ball rolling.